A Long Term Look at the CRB and Silver

Every market is comprised of cycles of various durations. Each of these cycles
is constantly ebbing and flowing with one another much like the currents, the
tide, the waves and ripples in the ocean. Sometimes these different cycles
are moving together and sometimes they move in opposition. In cycles analysis
the trend is defined as the direction of the next larger cycle. If the tide
is going out it does not matter that the smaller degree movements are moving
in opposition to the tide. The trend is set by the tide. The same is true for
the markets. What we try to do is identify changes in the direction of the
tide. This is not a science, but we can use the behavior of previous cycles
to develop expectations for the future. These expectations are developed based
on the quantitative data of previous cycles that can then be applied to the
present in an effort to make educated assessments about the present.

Today, I want to start with a look at a longer-term cycle in the CRB known
as the 3-year cycle. The direction of this cycle is like the tide. When it
is coming in, commodity prices rise as the general direction is up in spite
of the shorter-term cyclical movements, which could be moving down. When the
tide turns and the 3-year cycle tops, the general direction is then down and
prices will move lower from that point until low tide is reached. No amount
of reasoning under the sun will change this naturally occurring phenomenon,
as the cycle will have its way. The only question might be just how high or
how low the tide may be.

Below is a monthly chart of the CRB. You can see that I have marked each one
of the 3-year cycle lows. Like any other cycle, this cycle can contract or
expand, but it has historically averaged 35.5 months in duration from low to
low. This cycle is now in its 30th month with the February low having occurred
on the 25th month. Historically, there has never been a cycle to contract to
25 months. So, from that perspective it is questionable as to whether the 3-year
cycle low has been seen. The details of this have been covered in previous
newsletters. Anyway, based on these historical averages alone, the tide is
still moving out and once this upward wave has peaked it will then pull commodity
prices down with it. The confirmation of the downturn of this wave will come
with a downturn of my intermediate-term Cycle Turn Indicator and ultimately
with the monthly Cycle Turn Indicator.

Now I want to look at the impact that the 3-year cycle in the CRB has on the
silver market. Below is a monthly chart of silver. I have marked the corresponding
3-year cycle lows in the CRB on the silver chart. There is no denying that
the 3-year cycle in the CRB has a definite impact on silver prices. As you
can see from this historical data, this impact is simply a matter of record
and not opinion based.

Now the danger to silver, as I see it, is that there is evidence suggesting
the 3-year cycle low in the CRB still lies ahead. If so and if the historical
relationship between this cycle in the CRB and silver, as shown here for the
last 30 years, holds true, then silver is at risk of being pulled down by the
downward tidal forces as the CRB moves into its 3-year cycle low. The only
questions are, could the CRB have bottomed in February, which is statistically
unlikely, and if not how much will this force pull the silver market down?

Let's get away from the CRB now and take a closer look at silver itself. In
doing so, I want to shift our focus to the shorter-term annual cycle in silver.
This cycle averages just less than one year and for this reason we call it
an annual or seasonal cycle. I have marked this cycle's low with an "s" on
the monthly chart below.

I use quantitative data gathered from the behavior of previous cycles to develop
expectations for future cycles. When looking at the data surrounding the seasonal
cycle in silver, history shows that 76.19% of all seasonal cycles that have
failed to move above the previous seasonal cycle high have moved below the
previous seasonal cycle low. An obvious example of this can be seen with the
1980 seasonal cycle top. In this case the seasonal cycle bottomed in May 1980
and began moving up toward the all time highs again. But, this cycle topped
before these levels could be bettered. The result was a decline that carried
silver well below the May 1980 low. When a cycle fails to move above a previous
cycle high, I refer to this behavior as a cyclical failure. Other examples
of these cyclical failures at the seasonal cycle tops occurred in 1981, 1983
1984, 1985, 1987, 1988, 1989, 1994, 1996, 1997, 1999 and 2000. Each of these
cyclical failures lead to declines that moved below the previous seasonal cycle
lows. I've marked a few of the more obvious examples of this in blue on the
chart below. 1975 and 2005 are two examples where this pattern did not hold
true. In some cases these declines were modest and in some they were fairly
dramatic, but again, on average, 76.19% of these failures have lead to declines
below the previous seasonal cycle low.

October 2008 marked the most recent seasonal cycle low at 8.78. As you can
see on the monthly chart below, the seasonal advance out of that low has failed
to exceed its previous seasonal cycle high. Therefore, we now have a cyclical
failure in the making and the historical quantifications are telling us that
silver now has a 76.19% chance of a move below the October 2008 low. It would
take a move above the March 2008 high, with the current seasonal cycle advance,
to invalidate this setup. Based on the current setup, I do not currently see
this happening. However, the intermediate-term Cycle Turn Indicator and the
intermediate-term cyclical structure is now key and the developments over the
next few weeks or so are very important.

Next, I want to look at one of the longer-term dominant cycles in silver.
This cycle averages some 5-years in duration. You can see that I have marked
these lows on the chart below. Silver is now in its 4th year for the current
5-year cycle. The next low point for this cycle is ideally due in 2010.

So, we know that the cycle is getting long, but what can help us to identify
this cycle's top? For this answer we can turn back to the seasonal cycle. Notice
that each of the previous 5-year cycle tops have occurred with a failed seasonal
cycle. I have marked each of the proceeding failed seasonal cycle lows with
an "s" and the failed tops with a downward sloping trend line. Again, we currently
have a failed seasonal cycle in the making. Given that this cyclical failure
has occurred at all previous 5-year cycle tops, along with the fact that we
are in the 4th year of the current cycle, this is all highly suggestive that
the top for the current 5-year cycle has likely been made and that the low
still lies ahead.

When we combine the fact that the 3-year cycle in the CRB likely has another
leg down into its 3-year cycle low, it does appear that silver is now at high
risk for a significant downturn. This does not necessarily mean that silver
will collapse. But, it does mean that odds seem to be against silver at this
time and according to this data it is supportive of a top for the 5-year cycle
and lower prices now appear to be in the cards rather than higher prices. How
far down it goes and whether or not this historical setup continues to develop
is another story and I will be covering this in the newsletter and updates
as this continues to evolve. With the dollar now at now at its lows for the
year, we are at a critical juncture in regard to this setup and the next few
weeks should be very very important as to which way this mop is actually going
to flop.

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